New federal rules designed to make it easier for startups to attract investors have sparked complaints from investor groups that say the rules could end up making fundraising more difficult.

Organizations that represent angel investors, wealthy individuals who provide essential capital to startups in exchange for an ownership stake in the business, are upset about Securities and Exchange Commission rules that emerged earlier this month.

The rules, which permit startups to openly solicit funding from investors, also include new financial disclosure requirements that have upset the angel community.

“We value our privacy,” said Elaine Bolle, president of RTP Capital, a group of nearly 40 North Carolina angel investors who collectively have invested in about 10 startups in the past two years.

“The requirement that we provide our financial information to an entrepreneur is going to really tamp down angel investing.”

The Angel Capital Association, a national organization, also contends fewer angels will be willing to invest in startups under the SEC rules that take effect in September.

“I have not talked to any angel who would want to provide any of their private financial documentation to an entrepreneur,” said Marianne Hudson, the association’s executive director.

“This is an extra roadblock that will take some angels out of the game.”

Angel investors are a crucial source of funding for information technology and life science startups that haven’t yet matured to the point that they can seek larger sums of money from venture capitalists.

The seed funding that angels provide often enables startups to take their technology to the “proof of concept” stage.

Last year, angel investors forked over nearly $23 billion to more than 67,000 companies, according to the Angel Capital Association.

The rules were triggered by the Jumpstart Our Business Startups Act, a law passed by Congress last year.

The rules end a prohibition on “general solicitation or general advertising” that has been in effect since 1933 and which has forced startups, hedge funds and venture capital funds to raise funds from accredited investors behind closed doors.

The SEC defines an accredited investor as someone with an annual income of more than $200,000 or a net worth of more than $1 million after excluding the value of their primary residence.

Startups are restricted to soliciting funds from accredited investors because such investments are risky and an accredited investor presumably can take the financial hit if the investment tanks.

Lifting the ban will enable startups and others to openly solicit investors — advertising, via websites and social media, etc.

They’ll even be able to talk to news reporters about their fundraising plans, which the SEC has frowned upon.

The tradeoff, under the new rules, is that startups must take “reasonable steps to verify” that an investor is accredited in order to accept their money.

That’s in contrast to the current practice of investors simply attesting “under penalty of law” that they qualify, said Hudson.

The rules don’t spell out precisely what reasonable steps startups should follow, but they serve up examples that worry angels.

They include providing W-2 forms or income tax forms. Or the investor could submit a statement from their attorney, accountant or investment advisor attesting that they qualify as accredited.

Hudson said providing that third-party proof could be costly as well as “a hassle.”

The newest angel fund to surface in the Triangle is Physician Fund, which announced Monday that it has attracted $5.1 million from angel investors — mostly physicians — to invest in emerging healthcare companies. Physician Fund has targeted raising a total of $15 million.

Cam Patterson, an advisor to Physician Fund, said that the impact of the rules is uncertain in the absence of SEC guidelines on how it will interpret them.

“Having said that, I think the rules needlessly create anxiety at a time when angel investors are just getting back into the startup market,” said Patterson, who is associate dean of health care entrepreneurship at the University of North Carolina School of Medicine and chief of cardiology at the UNC Center for Heart and Vascular Care.

“The timing of this is awful. My hope is that they simply did not think through the implications of what they are doing and that they are either going to patch this or provide us with more direction promptly.”

Startups retain the option of eschewing general solicitation altogether, instead raising funds under the system that has existed for decades.

But attorneys who work with startups say they expect many of their clients to widen their fundraising net by openly soliciting investors in one way or another.

“I don’t know a lot of people interested in mass mailings or whatever, but there are definitely people who want to put a button on their website that says, ‘Are you interested in investing?’ ” said attorney Don Reynolds of Wyrick Robbins Yates & Ponton in Raleigh, N.C.

As you comment, please be respectful of other commenters and other viewpoints. Our goal with article comments is to provide a space for civil, informative and constructive conversations. We reserve the right to remove any comment we deem to be defamatory, rude, insulting to others, hateful, off-topic or reckless to the community. See our full terms of use here.

More in News

St. Paul Public Schools has established a where anyone can donate money to pay off anonymous students’ overdue lunch accounts. The district said it’s a response to a social media campaign that caused many people to call the district asking how they can give. Families in the district owe nearly $28,000 on school lunches. All district schools provide free breakfasts and most offer...

Weekend snow is on tap for much of southern Minnesota and western Wisconsin, with 3 to 6 inches expected in the Twin Cities and more elsewhere. The snow will be followed next week by the season’s first subzero temperatures. According to the National Weather Service, a slow-moving low pressure system will spread snow into western Minnesota on Saturday morning and...

Hennepin County Medical Center in downtown Minneapolis is planning to reduce its workforce by as much as 4 percent next year. The hospital plans to eliminate up to 275 full-time positions to balance the budget and keep the opening of a $220 million ambulatory and outpatient surgery center on schedule for 2018, the Minneapolis Star Tribune reported. The hospital’s workforce...

Two construction companies have agreed to pay a combined $147,500 in fines over safety violations in the death of one worker and injuries to another during construction of the Minnesota Vikings’ new stadium in downtown Minneapolis last year. Berwald Roofing is paying $113,200 for three violations, while Mortenson is paying $34,300 for one violation. The penalties are lower than Minnesota’s...

Larry Stanger, the Inver Grove Heights police chief who has been on paid leave since April while being investigated for alleged wrongdoing, will resign as part of a separation agreement reached between him and the city. The city council is scheduled to consider approving the agreement at its regularly scheduled meeting Monday. City Administrator Joe Lynch and City Attorney Tim...

St. Paul police are investigating a case of possible embezzlement at Town and Country Club. Police were notified of the matter on Monday and an investigator met with representatives of the club, said Steve Linders, a St. Paul police spokesman. A brief police report indicates the incident of possible embezzlement began in January 2010 and ended Dec. 2. Police are...